2023 (5) TMI 309 - AT - Income Tax

TP Adjustment - ALP adjustment - royalty segment treated as an international transaction u/s 92B - HELD THAT - This issue is no more res integra since learned co-ordinate bench s latest order in taxpayer s own case for A.Y. 2017-18 2023 (1) TMI 1029 - ITAT PUNE held that international transaction of payment of Royalty by the assessee for use of technical support cannot be clubbed with other international transactions under the Manufacturing segment. Both the parties are fair enough in not pinpointing any distinction on the relevant facts as well as law since the only exception taken is that of availability of relevant details for the purpose of computing the impugned adjustment.The fact remains that the foregoing co-ordinate bench has already decided the instant issue in principle. Faced with the situation, we adopt judicial consistency and direct the learned AO/TPO to frame the consequential computation as per law in very terms preferably within three effective opportunities of hearing. The assessee s instant former instant substantive ground succeeds for statistical purposes in very terms. Duty drawback addition - Assessee sole plea during the course of hearing is that the same already stands assessed in the succeeding assessment year 2019-20 i.e. the year of actual receipt - HELD THAT - Faced with the situation, we deem it appropriate to restore the instant issue as well back to the Assessing Officer to ensure that there shall not be any double addition for the instant issue once this amount has already been assessed. He shall finalize the consequential factual verification of issue in very terms.

Issues Involved:
1. Transfer Pricing Adjustment related to Royalty Payment
2. Aggregation Approach in Benchmarking Royalty Payment
3. Recovery of Royalty Costs on Exports
4. Selection of Comparables for Benchmarking Royalty Payment
5. Rejection of Comparable Royalty Rates Charged to Third Parties
6. Addition on Account of Duty Drawback

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment related to Royalty Payment:
The assessee contested the addition of INR 7,93,23,969 made by the AO and DRP concerning the international transaction of royalty payment for manufacturing activity. The Tribunal referred to a previous order in the assessee's case for A.Y. 2017-18, where it was held that the ALP of the royalty payment transaction should be determined separately under the "Other method" as prescribed under Rule 10AB. The Tribunal emphasized that each international transaction must be assessed independently unless they are closely linked. Cross-subsidization of unrelated transactions is impermissible. The Tribunal directed the AO/TPO to frame the consequential computation as per law.

2. Aggregation Approach in Benchmarking Royalty Payment:
The Tribunal rejected the aggregation approach adopted by the assessee, which combined the royalty payment with other manufacturing activities. It was held that the transaction of payment of royalty for technical know-how provided by the AE and other international transactions under the manufacturing segment were not part of a package deal or inextricably linked. Hence, the ALP of the royalty payment must be determined separately.

3. Recovery of Royalty Costs on Exports:
The assessee argued that the royalty paid on exports to AEs had been recovered on a cost-plus basis. The Tribunal did not find any substantial evidence to support this claim and upheld the rejection by the AO and DRP.

4. Selection of Comparables for Benchmarking Royalty Payment:
The Tribunal addressed the issue of selecting comparables for benchmarking the royalty transaction under the "Other method." The TPO had selected three comparables, which the assessee contested. The Tribunal noted that Rule 10AB allows for considering "same" or "similar" uncontrolled transactions. The Tribunal found that the assessee provided evidence of "same" uncontrolled transactions, where the AE charged higher royalty rates to independent entities in Korea and China for the same product. The Tribunal held that the transaction of payment of royalty was at ALP and directed the deletion of the addition.

5. Rejection of Comparable Royalty Rates Charged to Third Parties:
The Tribunal found that the AE charged higher royalty rates to third parties for the same product, indicating that the royalty payment by the assessee was at ALP. The Tribunal directed the AO/TPO to consider the "same" uncontrolled transactions over "similar" ones, leading to the deletion of the addition.

6. Addition on Account of Duty Drawback:
The assessee contested the addition of INR 27,31,022 on account of duty drawback received during the year, arguing that it had already been assessed in the succeeding assessment year 2019-20. The Tribunal restored the issue to the AO for verification to ensure no double addition occurs.

Conclusion:
The Tribunal allowed the assessee's appeal for statistical purposes, directing the AO/TPO to re-compute the adjustments as per the Tribunal's findings and ensuring no double addition for the duty drawback issue. The order was pronounced on 17th February 2023.

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